1Q14earningsdown7.2%YoYandup28.3%QoQ。
In1Q14,revenue+0.8%YoYtoRmb46.75bn.Netprofitwasdown7.2%YoYbutup28.3%QoQtoRmb1.51bnorRmb0.09/sh,inlinewithourforecast.
Salesgrewslightly;high-endproductsincreasedrapidly.In1Q14,salesofcrudesteel-2.7%YoYto5.65mntonnesandbillets+1.4%YoYor+3.4%QoQto5.54mntonnes(coldrolledautoplates+19.5%andultra-highstrengthsteel+220%),showingthecompany’sgrowingcompetitivestrength.Despitethepricehikes,ASPisstilllikelytohavefallenby2%~4%QoQin1Q14,inline.
Bothgrossmarginandexpenseratioincreased;netprofitpertonneofsteelproducedfellYoYbutoutpacedpeers’QoQgrowth.In1Q14,grossmarginexpanded0.7pptYoY,possiblyduetotheYoYdropofironoreandcokingcoalprices.Butadministrativeexpenseratiorose0.6pptandfinancialexpenseratioincreased0.8pptduetoFXloss.Asaresult,netprofitpertonneofsteelproducedfell8.5%YoYtoRmb283/tonnebutincreased24%QoQ,buckingtheindustrydowntrend.
Operatingcashflowshrankduetostockpilingandalongercreditperiod;netgearingratioroseslightly.In1Q14,operatingcashflowplunged81%toRmb356mn,mainlyduetostockpilingandalongercreditperiod.Netgearingratiowasup3pptto40%,stillatahealthylevel.
Trendstowatch。
ASPislikelytofallsequentiallyonex-plantpricecutsforMay.Afterseveralpricehikesin1Q14,thecompanyloweredex-plantpricesbyRmb100~Rmb150/tonneforMay,whichislikelytocauseaQoQASPfallin2Q14.However,thesharpironorepricedeclinecanensureagoodprofitability.
TherestrictedshareincentiveplanapprovedbyState-ownedAssetsSupervision&AdministrationCommission.Thecompanyplanstoinitiallygrant48.45mnshares(0.288%oftotalcapital)atRmb1.91each.
Earningsforecast
Wekeep2014/15eearningsatRmb7.27bn/Rmb8.25bn.
Valuationandrecommendation。
Thecompanyissharpeningitsedgeinthehigh-endautomotiveplatesmarketandhasamuch-better-than-averageprofitmargin.Onceitcomesonstreamin2016,theZhanjiangprojectwillenlargetotalcapacitybynearly40%andenablethecompanytocoverSouthChinaandSoutheastAsia.Andthereareequityincentivesformanagement.Thestockistradingatonly0.55x2014eP/Bwhileofferingadividendyieldof5.7%.ReiterateBUYwithaTPofRmb5.20,0.75x2014eP/B.